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Rent‐to‐Own Pricing: Theory and Empirical Evidence

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  • Sanjiv Jaggia
  • Hervé Roche
  • Michael H. Anderson

Abstract

The rent‐to‐own (RTO) industry given its emphasis on subprime or, at least, financially constrained consumers is often seen as exploitative with excessive financing costs. This paper develops a rational‐expectations competitive equilibrium model to explore the pricing mechanism of an RTO agreement. The model accounts for the contract's embedded options and several bundled services. Using detailed transactional data, we infer how customers exercise these options to calibrate our model for several product categories, contractual lengths and payment periodicity. The resulting predictions provide a justification for the high financing costs observed in the marketplace.

Suggested Citation

  • Sanjiv Jaggia & Hervé Roche & Michael H. Anderson, 2019. "Rent‐to‐Own Pricing: Theory and Empirical Evidence," Journal of Consumer Affairs, Wiley Blackwell, vol. 53(3), pages 1025-1055, September.
    • Handle: RePEc:bla:jconsa:v:53:y:2019:i:3:p:1025-1055
    DOI: 10.1111/joca.12216
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    Cited by:

    1. Yi-Long Hsiao & Chien-Jung Ting, 2022. "Pricing Rent-to-Own Options with a Barrier Level: Taking Housing Contracts as an Example," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(5), pages 1-3.
    2. Charlene A. Dadzie, 2021. "Reimagining the Global South: Consumer welfare and public policy insights from the United States' Gulf Coast," Journal of Consumer Affairs, Wiley Blackwell, vol. 55(3), pages 1178-1199, September.

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